Honeywell International Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results; amounts in millions except per-share data. Honeywell reported four operating segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $10,121 | $9,804 | $29,691 | $29,317 |
| Income before taxes | $1,783 | $1,632 | $5,285 | $5,015 |
| Net income attributable to Honeywell | $1,348 | $1,240 | $4,066 | $3,775 |
| Diluted EPS | $1.75 | $1.60 | $5.26 | $4.86 |
| Gross margin | 32.1% | 29.6% | 32.4% | 30.9% |
| Effective tax rate | 23.4% | 23.5% | 22.5% | 24.2% |
- Q3 sales rose 3%; management attributed the change to volume (+3%), price (+2%), currency (+1%) and acquisitions/divestitures (-3%). Nine-month sales increased 1%.
- Q3 and nine-month diluted EPS increased 9% and 8%, respectively. Management cited higher segment profit and pension income; the nine-month comparison also benefited from a lower effective tax rate.
- Q3 net sales and segment profit by business: Aerospace $3,657 and $780; Home and Building Technologies $2,790 and $458; Performance Materials and Technologies $2,260 and $526; Safety and Productivity Solutions $1,414 and $213. Safety and Productivity Solutions grew fastest, with sales up 21%, primarily from acquisitions and organic growth. Performance Materials and Technologies sales declined 3%, mainly due to divestitures, while segment profit increased 5%.
- SG&A was $1,447 in Q3 and $4,177 year to date, up from $1,367 and $3,976; it represented 14.3% and 14.1% of sales, respectively. Management cited higher labor costs, partly offset by repositioning benefits.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $3,794, versus $3,456 in 2016. Management attributed the increase mainly to lower working-capital cash use and higher net income, partly offset by $482 of additional cash tax payments.
- Nine-month investing cash outflow was $2,191, compared with $3,276; financing cash outflow was $2,387, compared with $708 provided in 2016. Cash and cash equivalents declined $454 to $7,389. Short-term investments were $2,781 at September 30.
- At September 30, current assets were $24,644 and current liabilities $18,225. Debt comprised $3,932 of commercial paper and other short-term borrowings, $1,398 of current long-term debt and $11,453 of long-term debt. The company reported $12,851 of total long-term debt including current maturities. It had no borrowings under its credit agreements.
- Nine-month capital expenditures were $613. Share repurchases were $1,335 and dividends paid were $1,554. The quarterly dividend was raised 12% effective Q4 2017, to $0.745 per share; $2.7 billion remained under the $5 billion repurchase authorization.
Changes, outlook and significant items
- Q3 gross margin improved 2.5 percentage points, primarily from stronger Aerospace and Performance Materials and Technologies margins and lower repositioning charges. Management reported nine-month repositioning and other charges of $583, including $152 of asbestos-related litigation charges and $167 of environmental liabilities.
- Management expected a 2017 effective tax rate of approximately 22%. Repositioning actions were expected to deliver $350–$400 of incremental pretax savings in 2017 versus 2016; expected 2017 cash spending was approximately $225, funded from operating cash flow.
- On October 10, 2017, after quarter-end, Honeywell announced plans to spin off its Homes and Global Distribution business and Transportation Systems into separate public companies, expected by the end of 2018. Completion depends on approvals, tax-free treatment, financing and other conditions; the filing warns the transactions could be delayed, altered or abandoned. The company also announced a Smart Energy segment realignment, with no impact on historical consolidated results.
- Environmental liabilities were $571. Asbestos liabilities totaled $1,551, alongside $434 of recorded insurance recoveries. Management noted uncertainty in ultimate environmental and asbestos costs and recoveries. An adverse ruling in retiree healthcare litigation could increase postretirement obligations by approximately $95 for post-2003 retirees and $129 for pre-2003 retirees.
- Honeywell planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It expected mostly consistent revenue recognition and no material consolidated financial statement impact, though certain Aerospace policies and balance-sheet presentation would change. It estimated adoption of an intra-entity tax-transfer standard could increase deferred tax assets and liabilities by up to approximately $500, with a corresponding retained-earnings adjustment.
- The filing disclosed certain non-U.S. subsidiary sales and services connected with Iran under stated U.S. authorizations and reported approximately $7.9 of Q3 revenue from UOP services under the relevant contracts.
Important facts for investors to verify
- Whether announced spin-offs meet their conditions, achieve tax-free treatment, and proceed on the anticipated timetable and terms.
- Underlying segment growth and profitability, especially the effects of acquisitions and divestitures, Aerospace government-services divestiture, and Advanced Materials’ spin-off-related comparison.
- Whether the projected tax rate, repositioning savings and cash spending are realized.
- Future cash generation, working-capital requirements, and debt and liquidity needs, including upcoming debt maturities.
- Changes in asbestos claims, insurance recoverability, environmental remediation estimates, and retiree healthcare litigation.
- Final adoption impacts of new accounting standards; the filing notes that some assessments and estimates may change.